Diary of a Startup – the rise and fall of ArsDigita

The Wayback Machine - https://web.archive.org/web/20020212134615/http://eveander.com:80/arsdigita-history

the rise and fall of ArsDigita
and lessons from the world of venture capital

by Eve Andersson

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This is a story about a company. A company that was profitable from Day 1. A company that built products that were useful to many other companies. A company that had ethics, that treated the breadwinners (programmers) with respect, a company that could afford to help people and give away software and training, while still having enough left over to grow and save a few $million in the bank.

That is, until the venture capitalists arrived on the scene. Lying to customers and employees became commonplace. Greed replaced philanthropy as each of the company's unique programs was dropped. But, this is a company, and the goal is to make money -- any positive impact on the world is secondary, right? The real question is: how much money did they make?

The technical and managerial incompetence of the VCs and those they hired drove the company into the ground. All but 10 of the 240 employees were fired, laid off, or quit. All of the $40+ million in venture capital was squandered. The monthly operating profit turned to loss as more talentless executives were hired who threw out the company's old, useful products and put their blind faith in engineers who spent millions building complicated software that solved no business problems.

This is a story that will teach you something about building a software product, about profitably running a company, and about what can happen if unqualified organizations obtain control.

The Birth of ArsDigita

Since the early days of the Web, I had been building web sites for big-name clients in California with my friend Aurelius Prochazka. Meanwhile, Philip Greenspun and two of his friends, Jin Choi and Tracy Adams, were doing similar work out in Massachusetts. When I moved to Massachusetts in 1998, we joined forces and were quickly able to quickly attract high profile clients, such as Levi Strauss, Environmental Defense, and MIT Press.

Our band of programmers, called ArsDigita ("Digital Arts"), was profitable from the beginning. We had no office, no marketing staff, no letterhead. But we did have a few thousand dollars' worth of computer equipment and our five motivated selves.

The Birth of the ACS

It didn't take long for us to realize that we were solving some of the same problems over and over again for each of our sites. It doesn't matter if a site sells custom-made slacks, lets people share their photography knowledge with other enthusiasts, helps people fight environmental battles against companies polluting their groundwater, facilitates the trading of financial instruments, or helps people find the best combination of red, white, and sparkling wines for their next soirée.

Every site we built needed:

1. to talk to a relational database management system (RDBMS) to facilitate the collection of content from its users
2. a means for registering users and recognizing them upon their return to the site
3. a permission system to enable administration of the entire site, a section of the site, or an individual content item
4. a mechanism for grouping users so that they can be served content or given permissions appropriately

Instead of reproducing this for each client, we wrote a general data model, a few web pages, and some shared procedures, and called this collection of code the ArsDigita Community System (ACS).

We distributed the ACS free and open-source, not merely to be altruistic, but because it made sound business sense. If you are doing professional services, the best way to get your name out, have more clients find you (yes, free marketing), and improve the code base is to share it with the open-source world.

The ACS began as a small core of functionality, but more opportunities for code reuse quickly arose. Many of our clients wanted discussion forums. Quite a few needed ecommerce. Polls and portals and intranets and calendars and address books were repeatedly requested. It would have been foolish to build this functionality one-off for each client. It would have been a wasted opportunity to build this only for ourselves and not let our work reap the benefits of an open-source release. Hence we began the release of ACS modules that could run on top of the core. Dozens of useful modules were created, and that is what led to the adoption of the ACS by programmers and companies world-wide.

Growth

A small group of developers earning lots of money, making clients happy, and developing and releasing a useful software product is wonderful, but ... to make a substantial impact on the world, you gotta grow.

And grow we did. At first it was difficult to hire people because developers don't feel safe working for a company with no office or regularly-scheduled payroll. So, in the fall of 1998, we moved into an office. It didn't cost us much to rent a lovely old house in Harvard Square (complete with showers and kitchen, both which were well-appreciated after nights of obsessive coding). In January, we began a payroll system so that people's paychecks would no longer be tied to when our clients paid the invoices. Even if people were earning a bit less than before the structure was imposed, they were happy with the change. We were still earning a large profit each month. And now it was easy to hire people.

On January 1, 1999, ArsDigita had 5 employees. By January 1, 2000, we were up to 57, almost all of whom were developers. We had very little overhead and profits were rising. Around this time, we started looking in earnest for venture capital in order to accelerate growth and to allow ourselves the luxury of taking developers off of paying client projects so they could work full-time on our core product, the ArsDigita Community System (ACS).

By the end of March 2000, we had 110 employees (almost double what we had 3 months previously), 7 offices, healthy profits, plenty of cash in the bank, and $20 million in annual revenue, with the revenue figures still on an upward trend.

Company culture

The amazing thing is that greed and ruthlessness were clearly not necessary for us to rake in the cash. ArsDigita managed to make a large profit giving away free software and training. The revenue came from services and support.

During the growth, we never gave up on our fundamental priciples. These principles that we lived by made the company a fun place to work where the opportunities for learning were enormous. It's easy to sleep at night when you know you are doing good things for your clients and for the world. And when the good things you're doing are also contributing the bottom line, directly or indirectly, you know you've got a winning company.

Some of our principles:

• Honesty. ArsDigita had a strict "no lying to customers" rule. This builds stronger client relationships in the long-run.
• Openness. We were completely open on our web site about our strengths, weaknesses, capabilities, our product features. We gave away all our knowledge about building collaborative web sites in Philip & Alex's Guide to Web Publishing. Even the company structure and salary structure were online. We had no desire or need to fool anybody. If companies think you can deliver something that you can't, either you're wasting everyone's time in the sales cycle or, if you get the contract, you're likely to disappoint the customer.
• Respect. Respect can have two meanings. One category of respect is the shallow "don't say anything negative about anyone else's ideas" type, which has been utilized above all else at the post-VC ArsDigita. But there's also a much deeper type of respect, where people's contributions are recognized and rewarded and there are no obstacles to advancement for capable and motivated people, regardless of their background. The latter type of respect was one of ArsDigita's foundations.
• Open Source. We packaged up all of our reusable, non-client-specific software and distributed the source code and documentation free of charge. The business benefits of open source are numerous enough to fill a large essay, but in brief, open source attracts and motivates employees (most good developers get a thrill out of having other developers use their code world-wide), makes sales easier (it's less risky for a potential client to base their business on your software), results in higher-quality code, enables contributions from the community, and establishes your software as a kind of world-wide standard.
• Teaching. ArsDigita employees had the opportunity to teach students at MIT, Caltech, Berkeley, and other universities that adopted the web applications course pioneered at MIT (6.916). We also TA'd boot camps, 1-3 week intensive training courses for developers who wanted to be able to extend our software, and could teach at the pioneering ArsDigita University, a one-year program that taught brilliant non-computer-scientists all the computer science course material in a typical MIT or Stanford computer science undergraduate education. Employees were encouraged to submit articles to the ArsDigita Systems Journal as well. Besides being an educational and satisfying experience for ArsDigita employees, it also benefits the core business by introducing ArsDigita's software to thousands of developers and helping the company identify potential employees.
• Non-profit work. Our programs included the highly-successful ArsDigita University, the annual ArsDigita Prize which gave awards of $1,000 - $10,000 to deserving and talented young people who built useful web sites, and ArfDigita, a site where animal shelters around the country could upload information about their available pets and then users could search for and adopt the perfect pet. Non-profit work is an excellent marketing technique and it can be useful for motivating and training employees.

Venture capital and new management

In late March 2000, ArsDigita received $38 million in financing, primarily from General Atlantic Partners and Greylock, with a bit thrown in by Bain and Trident Capital as well. In early April, Allen Shaheen, recommended by Greylock, took Philip's place as CEO. Philip was quite happy to let a "professional manager" step in and take over some of his day-to-day management duties, leaving him more time to concentrate on company vision, teaching, engineering, and evangelism. "ArsDigita University was one of the primary reasons I decided to join ArsDigita Corporation."
- Allen Shaheen, early April 2000, less than a year before deciding to shut down the program Our level of confidence [in ArsDigita] is high. We're pretty fundamental believers that, 10 years from now, a lot of corporations will look at closed software as a way of the past.
- Chip Hazard, Greylock partner and ArsDigita board member, as quoted in digitalMass, October 23, 2000 ArsDigita is clearly positioning itself to generate annual revenues in the hundreds of millions of dollars very quickly.
- Cameron Laird, SW Expert, December 2000

The future looked incredibly promising.

Life post-capital

Revenue continued to rise to about $25 million in 2000. Is this due to the VCs' genius and vision, or merely a result of the momentum built up before their arrival? Was the subsequent downfall, starting in mid-2000, due solely to the effects of the weaker economy in the United States?

It became increasingly clear to the employees, the customers, and the outside developer community that the VCs and those they had put into management had no idea what they were doing. They discarded the practices that had made ArsDigita a profitable company, destroyed the company culture, and showed their complete technical incompetence by throwing out the ACS, which had been repeately used to solve real business problems, and replacing it with new, partially closed-source software package that was hard to use, had serious performance problems, and met only a small fraction of the business needs that the ACS did.

By the middle of 2000, it was clear that the new management did not understand the mission in front of them. New engineers at our company were routinely complaining about the level of competence and experience we were provided by aD. Communications with the new CEO were unreasonable and frustrating. Contacts at aD went from programmers to project managers to sales VPs. All these people were trying hard, and in some cases doing pretty well - but aD had lost the things that made it unique and successful.
- Josh Stella, former ArsDigita client, April 26, 2001 One of the reasons I joined ArsDigita is its inspiring mission statement, which states that we do not ever lie to customers. The mission statement goes on to say that companies who lie to their customers need to spend time training their employees in the official lies before they can talk to customers, thereby making lying unprofitable.... This week, we were not honest with our customers about the severity of the security holes we discovered in the ACS. We employees even had to sit through a training session so that we would know how to discuss the security holes with our clients. This is a serious contradiction of our mission statement.
- Walt Mankowski, former ArsDigita employee, July 14, 2000 It was sad to see the company slowly being destroyed. It was as if all the life was being sucked out of the company and we had no idea why. Everything that made ArsDigita what it was slowly disappeared until all that was left was just another buzzword-spewing faceless corporation. ACS users moved on, joining in support for projects like OpenACS that still had the spirit of the former ArsDigita... Meanwhile, aD corporate slowly began to shut down programs, including the one that got me to be an ACS user in the first place: ArsDigita Prize. One day a small message appeared that said simply "The prize has been cancelled for 2001."
- Aaron Swartz, past ArsDigita Prize winner, April 24, 2001 It is easy to locate marketing copy on ArsDigita.com. However, it is difficult to get to the information that is actually interesting to anyone building or running an online community, or deciding whether to hire ArsDigita's services.
- anonymous user of arsdigita.com, September 4, 2000 ArsDigita was the company I dreamed of working for when I graduated... In 2000 everything began shifting. ACS 4 seemed an excellent thing, and everybody was excited, but it was never finished and then everything just turned to Java. Nothing against Java, but even I know that you can't sell a product that's not here yet. What happenned to the culture? None of the names and faces we knew posted to the bboards anymore. A few aD faces posted regularly, but mostly we saw a bunch of people only posting questions about the products they should be familiar with, and sporadically. Allan Shaheen only addressed developers twice, in what seemed to be posts typed by his secretary. ArsDigita's website turned to being a brochure more than anything else, which is not bad if you don't forget other things.
- Roberto Mello, computer science student, April 24, 2001 For months now, I've been trying to figure out how aD's management can just ignore the ACS community (and the ACSish market) they way they have. Barely speaking to us; releasing incomplete, unscalable, untested software to us; and finally just abandoning the whole thing midstream. And the only thing I can think of is that they are trying to clear out the community, get rid of the community memory, for when they rollout their closed source, java solution.
- Jerry Asher, developer, April 25, 2001 I heartily agree with you about the unfinished condition of ACS 4.x. We (furfly) have lost at least one prospective client because of it, perhaps more, and the project we're working on now is waaaay behind schedule, much of which is due to our stumbling over ACS 4.x issues. This is not to say that it is unusable, or unfixable, but only that it is unfinished - I don't want to disrespect the hard work that went into it, only the decision to release it before it was ready.
- Janine Sisk, Furfly co-founder, April 25, 2001 ArsDigita, an e-commerce company in the midst of layoffs and a major product overhaul, is bucking the trend of comrades selling open-source software... The change will allow the company to reach profitability by the first quarter of 2002... The company laid off 29 employees in the last week.
- CNET, April 5, 2001.

The founders fight back

Philip Greenspun has never been one to hide his opinions. If he thinks that an idea is stupid, he will bluntly say so. Therefore, Philip had many things to say after April 2000.

Philip's harsh words displeased the other board members (Allen, Chip Hazard from Greylock, Peter Bloom from General Atlantic, and ArsDigita's COO, Ern Blackwelder) so much that they stopped having board meetings after December 2000. Instead, they had "investor meetings" where all the board members except Philip (the chairman) were invited. In March 2001, Peter Bloom sent Philip an email, threatening public humiliation if Philip didn't resign from the board. Philip went to visit his lawyer who reminded him of his rights as majority shareholder.

It was time to regain control of our mis-managed company before it became nothing but a shell. On April 5, Philip Greenspun and Jin Choi, together holding a substantial majority of ArsDigita's shares, had a shareholder vote that gave the founders majority control of the board. They demoted Allen from President and CEO to only President, elected Philip CEO (one spot on the board is reserved for the CEO), promoted Tracy Adams and me (both already Vice Presidents) to Executive Vice President and placed us on the board as well, removing both Allen Shaheen and Ern Blackwelder. The two venture capitalists retained their seats on the board. But we had control.

Yes, it had required drastic measures to ensure that our ideas would be heard, but we were willing to now work hand-in-hand with Allen and the VCs to return ArsDigita to a state of health. But we didn't get the chance. Six days later, on April 11, 2001 Allen Shaheen, Ern Blackwelder, General Atlantic, and Greylock filed a lawsuit against Philip, Tracy, and me:

ALLEN SHAHEEN, ERNEST ) BLACKWELDER, GENERAL ATLANTIC ) PARTNERS 64, L.P., a Delaware ) limited partnership, GREYLOCK ) X LIMITED PARTNERSHIP, a ) Delaware limited partnership ) and ARSDIGITA CORPORATION, ) a Delaware corporation, ) ) Plaintiffs, ) ) v. ) Civil Action No. 18821 ) PHILIP GREENSPUN, EVE A. ) ANDERSSON and TRACY E. ADAMS ) ) Defendants. )

Now, I'm not a lawyer, but I never understood how it could possibly be legal for ArsDigita Corporation to be listed as a plaintiff, since that would have (obviously) been against the wishes of ArsDigita's majority shareholders. And how could it be legal for General Atlantic Partners, Greylock, Allen Shaheen, and Ern Blackwelder take hundreds of thousands of dollars out of ArsDigita's bank account and use it to pay their lawyers to sue ArsDigita's majority shareholders?

The case came very close to going to court but, at the last possible moment, the plaintiffs came to a settlement agreement with Philip. Perhaps the plaintiffs were afraid they would lose the case because the judge had looked at their "evidence" and said that he was uninterested in approximately 90% of it. The plaintiffs' lawyers had wasted their time and, more importantly, ArsDigita's money, preparing a case about Philip Greenspun's personality instead of thinking about whether someone's personality gives one a right to try to illegally seize control of a company.

In the settlement, Philip received $7.6 million. In return, he gave up more than half of his stock, resigned from the board, promised not to attempt to execute any control over the company, and signed a non-disclosure agreement. Before the settlement, Philip owned more than half of ArsDigita's stock. Now that the VCs owned more than half the stock, they had no need to settle with any of the other defendants.

The VCs poured a few more $million into ArsDigita so that it could take a few more gasps of air before collapsing.

VCs push out the founders one by one

The marginalization of Philip Greenspun started taking place quickly as Allen Shaheen discovered that it was difficult to work with someone who wouldn't let him get away with incompetence and dishonesty. Over the course of 2000, more and more responsibility was taken away from Philip and given to so-called professional managers who didn't understand the Web or software development. Instead of firing Philip outright, he was banned from decision-making meetings and was put in charge of the less profitable parts of the company.

In March, 2001, Jin Choi, the company's 2nd-largest shareholder was fired. Jin didn't seem to mind so much because he has never had any tolerance for anyone he deems stupid.

Around the same time, the VCs pushed out Aurelius Prochazka. Aure had built up most of ArsDigita's west coast operations. Most of the clients were there because of Aure. He had trained most of the developers. He had personally built some of the most important modules of the ACS. He could construct an enterprise-quality site himself that would normally take a team of 4 or 5 developers to create.

Aure's crime was that he cared about the company. When he saw ArsDigita executives making poor decisions (or no decisions at all), he wouldn't just sit there and let it happen. He tried to explain to them why other paths may be better to take, and when they ignored him, he wrote to the VCs. Apparently, the VCs didn't care that Aure generated millions of dollars for the company; they were more concerned about not being questioned. They told him that there was "no place for him at ArsDigita" and fired him.

Around this time, I was a member of the product team, led by Richard Buck, an Oracle refugee, recruited by the VCs. Richard Buck's arrival gave everyone great hope (could he revive the software so poorly mismanaged by Michael Yoon that it was way behind schedule and didn't meet any of our clients' needs?). Unfortunately, Richard Buck had a detrimental effect on ArsDigita by:

1. letting all technical decisions be made by a group of programmers that had never managed a client project
2. failing to put his foot down and reject bad architectures that had been selected merely because the technologies were considered fashionable
3. not realizing that, without modules, ACS is a useless product
4. not being able to motivate the product team to work more than 40 hours/week
5. allowing the product team to release untested code that racked up many megabytes of memory leaks after only a few hundred page loads
6. encouraging gossip and rancor within the company (for example, when ArsDigita's marketing department foolishly decided to discontinue one of ArsDigita's free services without notice, Richard sent out an email to the product team speculating about whether Philip was at fault [Philip had nothing to do with it])

Naturally, the VCs and Allen adored Richard Buck.

In my typical, non-political way, I tried to make the best of the situation and worked hard to improve the software and the processes. Richard Buck was very impressed with my work and told multiple people that I could do as much work in one day as most people do in two weeks. Given what I've written about Richard Buck so far, one might be disinclined to lend much credence to his opinion of my work. But my performance reviews have concurred: dedicated, brilliant, super-efficient, "capable of doing anything she sets her mind to," extremely high standards, a "tough but fair" manager. So I was certainly no slacker by anyone's standards.

So why did ArsDigita decide to fire me? Could it have been my candid response during my deposition when I was asked what I thought of Allen Shaheen? (I had replied that the economic downturn couldn't possibly be responsible for all of ArsDigita's ills.) Or might it have been because I was dating Philip Greenspun?

On July 2, 2001, about a week and a half after the settlement was finalized, Allen and I had a little talk about my future at ArsDigita. He "suggested" that I take a leave of absence, after which he -- and he said this with the utmost sincerity -- would try his best to find a good place for me at ArsDigita. I said that was fine; I would spend three months traveling. Allen and I agreed to talk again on October 9 and explore my options together.

Did Allen truly intend to "find a place for me at ArsDigita"? There is evidence to the contrary. On July 16, two weeks later, a terminated employee was FedEx'd an "exit package" by the Human Resources department, as is the standard practice when people in remote offices are terminated. Along with the exit package was a list of Employees Selected For The Termination Program. One may assume that HR did not mean to include that list; somehow they had accidentally put it in the FedEx envelope with the other materials. I do not know the purpose of the list. All I know is that I'm right there on the list ("VP, Operations     27"), which means I had been selected for some termination program on or before July 16. And thus, Allen had no intention of brainstorming with me on October 9. Another case of ArsDigita lying to its employees.

On October 9, Allen was "unable" to meet with me. Same for October 10 and 11. On October 12, I met with Allen in his office. We had a pleasant chat about my vacation, and I saw that he had a copy of my recently-published book Early Adopter VoiceXML (Wrox Press, August 2001) on his shelf.

Allen then handed me a packet of papers, the first of which was a letter dated October 11, 2001:

As you are aware, ArsDigita has decided to realign the organization to better achieve our revised corporate strategy. As a result of this decision, a number of positions will be eliminated. The purpose of this letter is to notify you that your position is among those that will be eliminated and that your employment with ArsDigita will be terminated on October 15, 2001... Given that I was qualified to do more than half of the jobs at ArsDigita, I know that I did not lose my job because of a re-org. The true reasons are obvious.

Now, What?

What has ArsDigita been doing over the past year?

Lying to the employees and to the press:

Tech startups aren't exactly on the front burner nowadays in the market for initial public offerings, but ArsDigita is steaming ahead anyway with plans to go public next year... The four-year-old Cambridge, Mass. Web software company is hoping to kick off its initial public offering some time in 2002... If it keeps growing and building its customer base, and the IPO market continues its gradual comeback, ArsDigita will be able to take itself public, Shaheen figures.
- Steve Gelsi, CBS.MarketWatch.com, May 24, 2001, a few weeks before Allen Shaheen admitted during his deposition that he didn't think ArsDigita would ever be able to go public Firing people, spending money: Beginning Thursday, ArsDigita Corporation has cut a confirmed 24 (from 165) employees and announced plans to close the Berkeley, CA, office. Rumor from several connected inside sources has the final tally climbing to 67 (or higher) over the next few weeks. Late last week the CEO was demoted by the VCs and replaced with Dan Keshian (http://www.greylock.com/team/DanKeshian.asp), one of Greylock's partners, while they wasted another $10 million (reportedly) on the company, presumably to help it stumble along to a fire sale. Those not yet gone are those in engineering, upper management, or are working on billable projects. Those on billable projects will be terminated upon project completion. Standard severance is reportedly 1 month salary plus unused vacation.
- FuckedCompany, October 11, 2001 Building products that nobody wants to use: When the VCs and Allen Shaheen seized control in April 2000 the company had revenue, profits, a customer list of AOL, HP, MIT, Oracle, Siemens, etc., a $160+ million valuation, $41 million in cash. In about 1.5 years the same company had a product that nobody wanted to use (though it was based on more fashionable tools), no profits, no cash, and few customers. Despite the infusion of more cash and a new CEO, a Greylock partner, in the fall of 2001, the company continued to spiral downward. Now they are dead and RedHat is buying some bones.
- FuckedCompany, February 7, 2002 And trying to make some money for themselves out of the scraps: ArsDigita, a privately held software company in Cambridge, was shut down on Tuesday. At least some of the company's assets, primarily from its professional services division, will be sold to Red Hat Inc., an open-source Linux software company in Durham, NC, according to sources close to the company... Dan Keshian, a venture partner at Greylock, became ArsDigita's CEO in the second half of last year to lead the company to profitability. Keshian was not present when the shutdown and sale were announced to employees.
- Jeff Miller, Mass High Tech, February 7, 2002

Lessons learned

Over the past 1.5 years, the VCs and their management team have taken a profitable, healthy, interesting company and:

• spent the profits that ArsDigita had saved
• spent all the capital raised
• destroyed an excellent software product
• released a horrible product a year behind schedule
• hired a slew of incompetent managers
• fired the people who made ArsDigita profitable
• repeatedly lied to customers
• repeatedly lied to employees
• repeatedly lied to the press
• repeatedly lied to the outside developer community
• and given themselves big bonuses as a reward

Greylock and General Atlantic Partners have mis-managed ArsDigita into the ground.

What can we learn from this? Be clear about control. Don't assume that people with MBAs know a thing about business, let alone technology. Don't throw out your prime source of revenue before another one is in place. Fashionable programming languages don't equal useful software. Don't lie. And steer clear of General Atlantic Partners and Greylock.

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Eve Andersson ([email protected])

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Comments

Does not look like Allen got a good deal either?

I read your nice writeup. It appears that Allen did not do too well either -- what with the demotion and all?

So what happens now ?

Quoting from your article:

"Revenue continued to rise to about $25 million in 2000. Is this due to the VCs' genius and vision, or merely a result of the momentum built up before their arrival? Was the subsequent downfall, starting in mid-2000, due solely to the effects of the weaker economy in the United States?

It became increasingly clear to the employees, the customers, and the outside developer community that the VCs and those they had put into management had no idea what they were doing. They discarded the practices that had made ArsDigita a profitable company, destroyed the company culture, and showed their complete technical incompetence by throwing out the ACS, which had been repeately used to solve real business problems, and replacing it with new, partially closed-source software package that was hard to use, had serious performance problems, and met only a small fraction of the business needs that the ACS did. "

Why bring in VC morons and their money?

If aD was doing so well with plenty of cash in the bank, $20Million in revenues and some of the most prestigious clients in and out of the tech industry, then why did you find it necessary to bring in VC money and the strings that come with it? I can understand wanting to leave the business work to someone who can devote their time to it, but if you were not hurting for cash and were profitable then it makes no sense to me why anyone would enslave themselves to VC influence.

Heh

funny how you have to be posting as an anonymous coward in order to critique the guy's work. That takes balls.

Things we did wrong

Well, beeing one of the lucky ones who got to work in that gorgeous house near Harvard Square (how I miss my happy coding days there, sniff), I've got to tell we made a couple of mistakes. We, as I too was blended by the idea of fast cash, quick growth and a castle on the scotish north sea coast.

1) Reduced transperacy. In the beginning everyone knew what was going on and could give his comments about it. Well and at least be heard about it (it was interesting to sit down with the VC guys, listen to what they talk and realize, it is a completly different world out there).

2) Giving the company out of the control of the developers. Though one could argue that Philip still had the majority share, it is obvious that he gave up control to outside people who had no clue about open source.

3) Try to market a product, as it was easier to bring a product company to an IPO instead of a services company. Bad move. Bad idea.

4) Leave a trusted product behind to engineer a new one, to leave it unfinished and embark on the large "Java" trail. There has to be a reason why TCL code is running in crucial systems like aircontrol, space aviation and atomic power plants. So it was reliable. And you could pick it up easily.

But after all, I would say it was one of the most human mistakes ever.

Greed and too high self esteem. Yes, we were good, but there are other smart people out there in the world as well. And as for Philip... If you can cope with his Ego, he definitly was a cool guy to hang out with.

If the company had grown along with the number of clients it had, plus lets say 5 really smart developers who work on the core and integrate the software and one or two sales/marketing persons to put Philips evangelism into structured ways and market it all over the place, it could have worked out.

Even after the VCs came in, we could have made it, if we did not grow so fast and spend so much money on "toy" stuff. I just remember the fish tanks, or the discussions once the free food policy was abolished. And if the VC had taken a stronger interest in AD and helped more with marketing it to their respective other clients and the big names out there.

On April 1st 2000 I left on my own account, so the further downfall was not experienced first hand, and therefore no need to add comments here.

All in all, AD was a great place, I enjoyed working there a lot, made good money, gained an aweful lot of experience. And I had very good friends who helped me cope with the "shock" of not having to work 60-100 hours per week and get back to a normal life. Maybe thats what some of those people so heavily ranting over at slashdot are missing.

common theme

I used to work in a 30 years old software company that does exclusively engineering simulations. In the midst of 1990s, much of our product is still deeply embedded in FORTRAN or other non-glamourous technology.

Despite the nature of our company was drastically different from aD, there were so many similuarities as new management and VC comes into the picture...

1. 90% of our company was coming from ONE product, yet the management decided to throw away and stop doing any maintaince release on the software. Instead, bulk of our development effort was betting on a new, unproven software which is masked by marketing slogan. This "killing the goose that lays golden egg" doesn't seems all that uncommon.

2. Remove those who were in the company for a long time. Call it a "weakness", they have some sentimental attachment toward the company and don't want to see the 30 year old company to go down. Naturally, they became the vocal and actual resistance to the new management.

3. Jump into fashionable technology. The mentality is almost like a high school kid wants to wear baggy jeans just because it seems to be the "cool" thing. Despite that the new "hip" probably created more problem than it created.

Of course, the differences in our company that we did managed to go public for a period of less than 1 year before everything collapsed (thanks to, in part, management's creative accounting).

It was clear that the management just want to bring the company to the public, and take the money, and go (in VC's term, this is called "first exit" strategy).

lessons not learned

It was interesting to read the 'lessons learned' section to see that, as happens all too often, the lessons learned are the wrong ones. It was all about being a victim of the greed and incompetence of the VCs and their minions; nothing about the greed and incompetence of the founders, who invited the devil into the house in the first place.

To hear it described, the pre-VC ArsDigita was a very cool place, where everyone was happy, making piles of money, and doing good things. What possible reason would they have to fundamentally change this setup? Nothing but the joy of gaming, the prospect of a really big score, seeking some combination of power and escape from the responsibility of running a successful company.

Money talks bullshit walks

When your company takes VC money you should expect that the investors are going to want an above average return on their investment. This takes a bullish management style and often requires drastic measures that seem unfair and irresponsible. However, in the case of aD, $35 million is a big chunk of change and the return needed to be substantial. If aD was doing well before the VC hookup then it would suggest that the founders themselves got greedy too and accepted an investment hoping for a huge payoff. Essentially, they made a deal with the devil.

Unfounded, unsupported business ideas are everywhere. Technologists think they the can do it all even though they lack business acumen and business people think they can do it all with weak technology. Both operational segments are sciences in their own right and should be treated as such. The demise of so many ".COMs" and emerging software companies is because of a lack of parity, a lack of recognition that all facets of the business make the gears of profitability turn.

Successful companies are able to find a happy medium between the technology and its business application. Both sides need to make concessions in order for a company to succeed. I have watched many companies flounder because of arrogant owners who think they know everything and don't let experienced business people help them. I have also seen amateur business people take down solid ideas developed by young technologists who thought they hired the right talent.

aD failed because the founders made bad decisions. Entrepreneurs need to remember that solid business aren't built because someone gives them money, but rather because they have a good idea and know how to execute a manageable business plan. Just because you have money and call yourself a Venture Capitalist doesn't mean you know what youBre doing. There are a lot of stupid people with money and many of them think they have the wherewithal to be VCs.

aD should have seen it coming - and deep down inside I'm sure they did but greed got in the way as with many nascent technology companies. I hate to say it, but this is a very typical story, with a very typical conclusion. Common sense and simple business 101 tactics could have avoided this problem all together.

Uggh!

I too worked for a small company that was innovative, profitable, successful, and run into the ground by, not VCs but still, a group of greedy outsiders looking to line their own pockets. I'll never understand why a bunch of greedy pricks think that having money, means that they know more about a technology than the person who developed it.

The story is never told from only one person...

It's an old Irish saying. I'm sure there were very cool things about aD before the Vc's and that there were very bad things about aD after but not all of each.

-- Trevor Williamson

What was broken?

Common sense would dictate that if you're investing $40+ million in a company, you're doing it because the company is successful. If they're successful, and you're a smart VC, you'd put in your money and leave everything else alone, including the culture, the people, the way things work. Here was a company that was very profitable, among a thousand or more companies that were riding the internet wave that weren't even close to breaking even.

I suppose that with the investment of a lot of money, those doing the investing naturally sought out decision-making control or input into the business. Buying a large stake in an growing and profitable airline doesn't make me a pilot (although I guess in Phil's case it did, since he's used some of his settlement proceeds to buy an airplane, or so I hear).

Hate to be a busybody

But have you and the other founders who (it sounds like) got shafted talked to a lawyer? $7.6 million for Philip and nothing for the rest of you?

I think all the VC-bashing is misunderstanding what they are about, and why a company would go to them in the first place. They're not in it for the long run and they don't care if you're profitable. They are there to finance growth, to get the company as quickly as possible to the next stage (IPO or acquisition). If they can't, they generally get out of the investment quickly (i.e. liquidation). Doesn't matter if its because of recession, or the sudden collapse of your market, or their own incompetent management filling their pockets (hey they could have worked at Enron instead), you get big or they want their money back.

At the time, no question that aD wanted to grow fast too. Not because of greed, like most people seem to think, but fear, fear of competitors who were getting VC money, who were getting big fast.

I think that the move to Java followed logically from that requirement. I'm sure you were having trouble getting tcl past corporate IT managers, especially for mission-critical (read big $$$) applications. Corporate IT managers have that "checkbox" mentality that often requires all sorts of over-engineering (or the illusion of it) to get past them. (Does it have "object-oriented development? n-tier architecture? submersible arrays? ;-)"

And it just seems to me that the chain of events leading to the forcing out of Philip could have been prevented by proper due diligence before signing with the VCs. No matter how big the stack of contracts was.

And I hate to say I told you so, but I did (url available upon request).

Digital Arts and socities

Our HyperFunction Consortium is working on key and pivotal digital data structures ( F-rep) , but we are very aware that such complex digital technologies are providing increasingly powerful (Moore's law) computations and knowledge that can be used for destruction ( Bill Joy Spiritual Robot TechNetCast ) by small groups (Sept 11) or large organizations.  The World Trade Organization (WTO), global corporations, that are For Profit Organizations (FPO) in general have little social or environmental dictates other than profit for their major players, and these organizations are being vastly enabled by high-tech to be destructive to the environment for profit with little or no public accountability.

We are very concerned about the ethical "end use" and social impact of the powerful digital technologies we develop, so that we were prompted to develop the following:

The Greater Good Public License agreement which is about not only digital freedom, but also ethics and social responsibility.  The hope is to promote free and open digital societies based on sharing knowledge, universal human rights and a sustainable future.   We now have a small global group of "digital knowledge workers" doing development under GGPL.  That "Free and Open Source"  organisms can work has been demonstrated by the development of Linux .  It and other projects like it are done by individuals not for direct personal financial benefit, but for intellectual stimulation, acquiring skill, digital freedom and other social reasons. However young professional programers,  professors, students and individuals working on these projects do it mostly on a part time basis 14.4 hrs/week.  There is a need to create social structures to support people working for digital freedom, human rights and environmental rights.  We have been asked to develop a GGPL business plan and most recently we have received a Request For Proposal (RFP) from granting organizations here in Japan.  The RFP was unexpected, and we did not have enough time to create a proposal for funding as good has we would like, but we will continue to work on it.  Here are some of the main points: Digital and Academic Liberty of Information (DALI) Project .

Well, that's the high points of what we are about.  Please read the proposal to change the current social structures, that kill digital social structures and digital cultures.  We are having a free workshop the 27, 28 of March.  The workshop is called Digital and Academic Liberity of Information ( DALI ).

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